Four years after flatlining, San Diego's borrowing ability was revived instantly yesterday when a ratings agency restored the city's credit and removed the biggest obstacle to a backlog of capital improvements.

The action marks Wall Street's greatest show of faith in city finances since 2004, when plans for new libraries, fire stations and a range of repairs were scuttled amid credit problems caused by pension and accounting scandals.

Mayor Jerry Sanders, who is in the midst of a tough re-election campaign, said the news from Standard & Poor's, one of three major credit-rating agencies, marked “the most significant day” for San Diegans in four years.

Councilman Kevin Faulconer echoed the sentiment and said the City Council stands ready to embrace major borrowing plans the mayor will soon put forward.

“All San Diego neighborhoods are going to benefit from today's news,” Faulconer said. “This is going to help improve our streets, fix our pipes and improve the quality of lives of San Diegans.”

But businessman Steve Francis, Sanders' main challenger on the June 3 ballot, urged restraint yesterday. He downplayed the development by saying that a more significant day for San Diego came 18 months ago, when the federal government sanctioned the city for issuing faulty borrowing documents under a previous mayor.

Credit costs
by the numbers

$1.3 billion: Total city borrowing from private sources since 2004, when San Diego was blocked from the public bond market.

4.76 percent: Interest rate San Diego paid on $224 million of sewer bonds in May 2007.

3.34 percent: Interest paid at the same time by a AAA-rated agency in the state.

$3 million: Difference in the city's $11 million annual debt payment if officials could have secured the better rate.

Standard & Poor's “gave us a new credit card, but we have to be very careful . . . that we don't run it up,” Francis said.

Voters will decide how all this affects the mayor's race, but the financial effect on the city is clear.

Generally, it means that the city will see interest rates one-half percent to 1 percent lower when it resumes borrowing money on the public market instead of from private banks. Completing the paperwork to issue bonds will take four to six months.

Politically, it also seems to shore up support for Sanders' stated plans to borrow hundreds of millions of dollars for water and sewer system upgrades and at least $100 million for a range of other delayed maintenance projects.

Cost savings could be realized as early as January, as San Diego moves ahead on new bond deals and refinances existing ones.

The ebullient mood in the mayor's office yesterday stood in sharp contrast to the somber state of affairs on Sept. 20, 2004 – the day the rating was suspended and Mayor Dick Murphy read a brief statement but refused questions.

Before that day, the last major California city to have its rating suspended by Standard & Poor's was San Francisco in 1980.

Overview

Background: San Diego's credit rating was suspended by Standard & Poor's in September 2004 as the city's pension and accounting scandal widened.

What's changing: The rating was restored yesterday by S&P, which said “recent improvements in city management practices will continue to address the city's long-term financial challenges.”

The future: Using its newfound creditworthiness, the city plans to borrow to address a backlog of road, sewer and other projects. Critics warn against repeating past mistakes and becoming overextended.

“The positive outlook reflects the expectation that recent improvements in city management practices will continue to address the city's long-term financial challenges.”

“Should management continue to make necessary budgetary adjustments to offset projected budgetary gaps and target structural balance and financial stability, we could raise the rating into the next category.”

“The city spends the majority of its budget on public safety and homeland security, which represented 53% of general fund expenditures in fiscal 2007. In fiscal 2006, the city's unreserved general fund balance totaled roughly $40 million, or a good 4.8% of expenditures and transfers.”

“We consider San Diego's management practices good under our Standard & Poor's Financial Management Assessment (FMA) methodology, indicating practices exist in most areas, although not all may be formalized or regularly monitored by government officials.”

“Management indicates that the city and the pension board are on track to correct all items in a compliance statement from the IRS by June 2008 in order to avoid penalties associated with past violations of its pension system.”

The rating reinstatement is Wall Street's second positive sign for San Diego since March, when Fitch Ratings changed its view of the city's fiscal health from negative to positive, a precursor to a rating upgrade. Meetings to discuss that possibility are set for June 4, the day after the election.

Standard & Poor's rates the city's general obligation bonds at A, its sixth-highest ranking and five ratings above junk bond status. Before the suspension, the rating stood at AA-, two slots higher than the new one.

The new rating reflects strengths such as the city's diversified economy, healthy city reserve levels, recent improvements in management practices and moderate debt levels. But it also factors in weaknesses such as the housing market tumble, fresh auditing delays, insufficient internal controls, and massive deferred maintenance, pension and health care obligations.

An 11-page report from Standard & Poor's said the rating could rise “should management continue to make necessary budget adjustments to offset projected budgetary gaps and target structural balance and financial stability.”

Fitch analyst Amy Doppelt said the action by Standard & Poor's gives the city a rating from all three major rating agencies, and that helps attract the best interest rates from a large pool of investors on the public bond market.

Sanders called it “proof that we are succeeding at getting this city back on track financially and managerially,” echoing his central re-election theme.

Tom Shepard, Sanders' campaign consultant, said he plans to use the restored credit rating in upcoming television ads and mailers to undercut some of Francis' criticism that progress has been too slow at City Hall.

The timing of Standard & Poor's announcement is also significant for Sanders because it came three days after the council deadlocked 4-4 on his pension reforms, leaving the mayor one vote short of imposing labor contracts on three unions and sticking a hole in one of his biggest 2005 campaign promises.

The city's credit rating had been suspended since before Sanders' 2005 election, leaving San Diego locked out of the public bond market unless it wanted to pay exorbitantly high interest rates. It instead was forced to rely on a growing number of private bank deals, and missed out on historically low interest rates that would have meant much lower costs.

At times in 2004 and 2005, the interest rates for a limited number of public transactions fell as low as 1 percent, according to annual reports compiled by the California Debt and Investment Advisory Commission.

San Diego's return to the public bond market doesn't necessarily come too late to benefit from rates that have hovered at 4 percent to 5 percent since 2001 on 20-year municipal bonds. They were fetching 4.53 percent this week.

Since 2004, the city has paid millions more than it otherwise would have by privately borrowing more than $1.3 billion in a mix of short-and long-term deals.

A recently approved plan to borrow $103 million from Bank of America for street and other repairs will be re-examined in the next week to weigh potential savings of a public transaction against possible building delays.

Council President Scott Peters said gaining the rating took “a lot of teamwork,” but City Attorney Michael Aguirre said most of the credit belongs to his office.

If it had not been for his attorneys' work on a settlement with the Securities and Exchange Commission and on an in-house group that oversees financial disclosures, Aguirre said, “We would not have had our credit rating restored.”

He cited continued questions over the city's internal controls as reasons that the city did not receive top grades from the agency. The city was only in good enough shape, he said, “to satisfy their minimum standards.”

Roger Lowenstein, a financial journalist and author of a new book that studies pension debacles like San Diego's, said Standard & Poor's action is good news for city officials, “but hopefully they won't get carried away” when resuming borrowing.